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Monetary Union: Fiscal Stabilization In The Face of Asymmetric Shocks

  • Kirsanova, Tatiana
  • Satchi, Mathan
  • Vines, David

This Paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union that incorporates persistence in inflation, and examine non-cooperative interactions of fiscal and monetary authorities. We find that particularly when inflation is persistent, the use of fiscal policy for stabilisation can significantly improve welfare over and above that which arises through the working of automatic stabilisers. We conclude that a regulatory framework for fiscal policy in a monetary union should allow a role for active fiscal stabilisation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4433.

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Date of creation: Jun 2004
Date of revision:
Handle: RePEc:cpr:ceprdp:4433
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  18. L. Lambertini & R. Rovelli, 2003. "Monetary and fiscal policy coordination and macroeconomic stabilization. A theoretical analysis," Working Papers 464, Dipartimento Scienze Economiche, Universita' di Bologna.
  19. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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